Save-A-Lot Losing Some Momentum
By George Anderson
Supervalu’s limited assortment concept, Save-A-Lot, has seen its business turn slightly southward as it deals with the impact of higher fuel prices, increased competition and the need to upgrade stores.
Jeff Noddle, chairman and chief executive of Supervalu, told analysts that the company remains confident about the banner’s long-term prospects, “But it’s not going to be a smooth ride all of the time.”
Mr. Noddle said that higher fuel prices have left the lower-income consumers who shop at Save-A-Lot with less money to spend on food.
He also mentioned that the concept is seeing competition from all sides, including traditional grocery outlets and dollar stores.
“Everyone wants to sell consumable food today,” he said.
To help Save-A-Lot licensees get righted, Supervalu plans to make an investment in store remodels. According to a report in the Star Tribune of Minneapolis, Supervalu estimates it will cost $20 million to $30 million to upgrade up to 300 stores. The company did not specify how much it would kick-in to help licensees complete planned remodels.
Eric Larson, an analyst with Piper Jaffray & Co., said many Save-A-Lot stores are in need of an upgrade noting, “When assets look tired, it does impact the performance.”
Moderator’s Comment: What do you see as the full story behind Supervalu’s admission that Save-A-Lot’s sales were running slightly negative? Are the challenges
being faced by Save-A-Lot and the softness in its business a reflection of that operation alone or do they have implications for other limited assortment grocers, as well?
–
George Anderson – Moderator
I also wanted to add that I like the prospects for Save-A-Lot, too. While Wal-Mart does appear to impact their stores, Wal-Mart also has cleared a path for their growth by enabling Save-A-Lot to obtain the skeletal remains of former supermarkets that Wal-Mart destroyed. In rural areas where the Hispanic population is skyrocketing, sometimes Save-A-Lot is the only store that is adding more Hispanic products. Save-A-Lot has also been one of the few chains to move back into the inner cities that have often been left void of supermarkets.
The newspaper article says that Supervalu may be putting a renovation investment into the franchisees’ locations. I can think of at least 2 other franchisors that lent money to their franchisees: Paperback Booksmith and Boston Chicken. In both cases, the franchisor was throwing good money away.
It is best for franchisors to refrain from funding their franchisees.
High cost of fuel is just an excuse. The biggest problem at Save-a-lot is two fold: the demands for more money to be sent to the parent company (Supervalu) has put an exceptional strain on their ability to control internal mark-up and, second, the decision four years ago to buy Deal$ Nothing over a Dollar, the extreme value dollar stores, has proved to be a disaster. To prove point no. 2, when was the last time you have heard anything about Deal$? They have not opened a new store in over two years and, in fact, are just waiting for leases to expire so that they can close more stores (some thirty to date with 10 – 20 more this year). To prove point no. 1, both Aldi and Wal-Mart Supercenters, as well as other retailers, have significantly decreased the price differential between themselves and Save-a-lot. Save-a-lot advertises that you can save over 40% by shopping their stores but recent price checks indicate that this percentage has fallen to less that 10% when compared to WMSC and actually a negative 8 – 10 % when compared to Aldi.
High cost of fuel is not the issue…higher cost for fuel may limit some spending but, at the same time, it forces other households to enter the value segment as a way to make up for lost money due to the high cost of fuel. Anybody who says fuel is impacting their business is simply using an easy excuse for other problems….tired stores and increased competition.
You can’t tell a thing from one quarter’s results. Beyond that, according to the material I read, the comparable quarter last year was supported by a major advertising campaign that did not run this year. Save-A-Lot has a lot going for it including the loyalty and experience of its franchisees, who should be supported. The extreme value portion of the supermarket business is and will continue to be in flux for at least the next three years. Clearly, the food retailing market demonstrates that everyone is vulnerable, and it is those who have sufficient consumer value, a consistently executed plan and organizational savvy who will survive the most heated periods of competition and be in a position, when the smoke clears, to thrive. Save-A-Lot, in my opinion at least, is one of the food retailers who will emerge from the chaos.
Save-A-Lot needs to understand that their concept, though a good one, does not work in every market. They put “rubber stamp” stores in areas of diverse ethnicity and expect it to work the same there as it does in a pure “meat and potatoes” market. They found this out the hard way in Baltimore, having just closed several recently new stores. Additionally, as competition has zero’d in on similar levels of niche marketing, SAL’s strategy in established locations has cost them sales. I can imagine that this is happening country-wide. Conventional retailers are learning to compete. Why should a consumer, regardless of income level, pay more for a non-branded item (named after an SAL buyer) when they can buy a national brand at conventional retailer for less? TNT’s have become “Temporary and NOT Terrific.”
My insightful colleague Ryan has captured my thoughts perfectly. I still like the prospects for Sav-A-Lot.
I was surprised to hear Supervalu make excuses. They typically show a bit more class. Poor people get food stamps, so poor people eat for free – so I don’t buy the gas price excuse. And at Save-a-Lot, you can eat like a king on food stamps. When things are not going right, retailers often will blame something. It could be gas prices, the weather, or the day that Easter fell on. When business is good, things like gas prices and the weather are quickly forgotten. Comments like, “Everyone wants to sell consumable food today” seem sort of lame because everybody was selling consumables last year, and the year before too. I wonder what retailers that are setting new sales records are saying about their competition and gas prices.
As far as the competition, I think Wal-Mart Supercenters are having the biggest impact on Save-A-Lot. In my opinion, it is because Save-A-Lot does not seem to have a large price advantage over Wal-Mart the way Aldi does. When a Wal-Mart Supercenter opens near an Aldi, often the sales at Aldi will go up. However, when we do post-mortem studies on Save-A-Lot, sales at those stores will often significantly drop.
If they spent $30 million to remodel 300 stores, that is only $100,000 per store, which amounts to not much more than routine maintenance. There really is not much more you can do for a Save-A-Lot other than a fresh coat of paint and perhaps a trendier design.
The quick assumption is that where there is smoke, there is fire, but I’m not so sure in this case. Jeff Noddle has a long track record of being a straight, highly pragmatic shooter even when it wasn’t always to his advantage. So, let’s take him at his word, given that his word is usually good. In a general sense, what impacts Save-A-Lot ought to disproportionately impact other operators. Of course, scale brings its own problems, especially when it comes to items like fuel costs.
I agree with Bruiser in that Supervalu is putting more pressure on SAL to deliver a higher contribution back to corporate. The issue is that SAL is putting this requirement back on its vendor community to subsidize this need. The vendor community is also faced with the same inflationary pressures.
I read today that 7-11 has had 30+ quarters of rising comp sales. Aren’t they a limited assortment grocer? Don’t their customers care about gas prices?
Yes, I realize that Sav-A-Lot and Aldi aren’t convenience stores…but I get the feeling that a lot of their customers are the same people that go to 7-11.
What can be learned from 7-11’s success that can be used by Sav-A-Lot and Aldi?
We have trained consumers to continually expect more for less. P&Ls have compressed to the point that they demand efficiencies that independents simply cannot create in a single store environment. Investments take too long to recoup and, as a result, independents are too slow to reinvent and reinvest.
Supervalu thought they’d found the silver bullet in Save-A-Lot, as did those independent retailers that were running already broken businesses as they signed on. They were desperate for each other.
Smart independents realized that it was cheaper to operate a slowly failing business than to get out of one completely. Either there was no one to buy them or no alternate use for their PP&E. Underserved or abandoned markets allowed SAL to flourish, but the fundamental issues remain broken. If Supervalu is willing to invest to levels that keep SAL stores competitive, they might just make it…but I’m not sure shareholders are willing to pay that high a price…unless they realize that it’s cheaper to operate a slowly failing wholesale business than to get out of one completely.
Irony never promised to be gentle.